With 2010 quickly winding to a close, the window of time between Thanksgiving and New Year’s Eve is a great time to clear the To Do list of those end-of-year tasks like tracking expenses and evaluating your tax liabilities. Much still depends on how the ‘lame-duck’ Congress will vote on measures to continue many of the tax cuts from the Bush tax cuts of 2001 and 2003 or if they will simply take no action and allow them to die out. The options here are based on the assumption that these cuts will end as the crystal ball drops in Times Square this December 31st.
The interest on business loan is generally deductible. In order to take advantage of a tax deduction, you must report the total amount of the loan, and the assets and expenditures financed must be necessary to operating the business. One notable caveat is a situation in which you negotiate with a creditor or lender to reduce your debt. If any debt is forgiven, you may owe taxes on this amount.
Businesses can deduct all “ordinary and necessary” business expenses from their revenues to reduce their taxable income. Some deductions are obvious—expenditures in such areas as business travel, equipment, salaries, or rent. But the rules governing write-offs aren’t always simple. When in doubt, talk with your tax advisor, but don’t overlook these potential deductions:
Section 179 Deduction - In lieu of the bonus depreciation, you also have the option of taking an immediate write-off for up to $500,000 of the cost of assets placed into service in both 2010 and 2011. The cap for the write-off is $2 million of assets in use. After the cap is reached, the $500,000 write-off is reduced one dollar for every dollar of assets.
Bonus Depreciation – Bonus depreciation may be a great option for you in 2010. If you’re considering new equipment or a capital purchase now is a great time to do it. The 50 percent bonus depreciation runs out at the end of 2010. If you make a purchase now, you can immediately deduct 50 percent of the expense in 2010. The remaining 50 percent will be recovered through traditional depreciation timelines. Bonus depreciation can be applied on any qualifying purchase with a useful life of less than 20 years including machinery, land improvements, equipment and even farm structures. Remember that whatever you purchase, it must also be placed in service by the year’s end in order to qualify.
Start-up Costs – For 2010 only, the maximum amount that can be deducted for new business start-up expenses is $10,000. Startup costs exceeding the $10,000 amount can be deducted over the 180-month period of the business’ existence. There is also a cap of $60,000, where the deduction is then reduced dollar for dollar for every dollar spent over $60,000.
Business Losses – Business losses can be deducted against a business owner’s personal income to reduce taxes. If a business owner’s losses exceed personal income for the year, some of the year’s business losses may be used to reduce taxable income in prior and future years.
Home Office – A home office should never be overlooked for potential deductions, but be cautious how you deduct expenses and what ‘qualifies’ as an official deductible expense. The IRS says the home office must be a space devoted to your business and absolutely nothing else. So while you’re scuffing around the kitchen with a cup of coffee and your BlueTooth wrapped around your ear, the kitchen itself isn’t qualified as a ‘deductible’ space because it is used for other purposes in the household. You can deduct space within a room that is solely allocated to your business, but measure carefully and talk with your tax advisor to see if this is your best course of action. Review your office expenses, telephone, Internet and other typical expenses and be sure you have receipts or monthly bills for each expense.
Mileage and Travel – Keep accurate records of your business travel including tolls, parking, and even hotel costs for overnight stays and they are 100% deductible. For the home-based business owner, a meticulous auto log can be worth thousands in additional mileage deductions (at $.50 per mile in 2010) for business-related trips to the bank, post office or even the office supply store. Beware that business-related meals and entertainment is deductible to the extent of 50% of the cost is typically deductible and must meet the IRS’ rules to qualify. Direct gifts to clients such as holiday baskets are also 100% deductible up to $25 per person per year.
Insurance Premiums – While premiums are climbing higher and higher, the good news is that for self employed individuals covering themselves and their spouse dependants the premiums are a deductible expense on your tax returns for both income and SE tax purposes for 2010. A few caveats, if your spouse works for you and is covered by the plan and you are covered through your spouse, be sure that the work is legitimate and that the health coverage is offered equally to all employees.
Charitable Contributions – It’s not too late to make a last minute 2010 charitable contribution to your favorite non profit and include it this year’s taxes. Just remember that you must donate to a 501(c)3 organization and that your gift must follow IRS rules for acceptable contributions.
If you’re in the position of making too much money in 2010, any collections your business can defer from 2010 into 2011 will reduce your tax bill. Remember that any deferral strategy will depend entirely on your current business tax strategy and projected earnings for 2011, so talk with your financial advisor before deferring collections.
Hang on to your losing investments – at least for now. If your property has lost value this year, it may make financial good sense to hang onto it until next year. Long term capital losses may offset any long-term capital gains. These gains may also be taxed at a substantially higher rate (this is especially true if the Bush tax cuts are allowed to expire) in 2011 and if the losses exceed any gain you may make, it can also be used to offset ordinary ncome up to $3,000 per year, which again may be taxed at a higher rate.
There are many other tax options for small business. To discover the best possible tax solutions for your situation, talk with a Fiducial tax advisor today by calling 866-FIDUCIAL or visit the web site at www.fiducial.com.